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AQ Feature

Bloc That Trade

The region's existing trade blocs have not produced productive integration. Why not bring them together?
Photo: U.S. Department of Agriculture (Flickr)

The old vision of economic integration in Latin America and the Caribbean (LAC) has failed. Over the past decades, LAC countries have concluded more than 60 bilateral trade agreements, as well as formed a number of powerful trade blocs. But the region’s social, political and economic advances have not produced the productive integration that would exploit the benefits associated with uniting over 600 million inhabitants in a territory larger than China and the United States combined.

Today, LAC remains no more than the sum of its parts.

All of the countries in the region belong to at least one bloc. Although this has marginally boosted intra-LAC trade, it has limited the amount of value-added goods produced across different countries. While 80 percent of regional trade enjoys preferential tariffs,1 interregional trade is low, and there are no important value chains—in other words, instances in which a good’s production stages occur in different countries.2 In 2010, the Grubel-Lloyd index,3 which measures intra-industry trade, ranked LAC lower than Asia in 1985 and more than two times lower than Asia in 2010.4

In the past six decades, LAC created trade blocs with a strong geographic component: the Mercado Común del Sur (Southern Common Market—Mercosur), the North American Free Trade Agreement (NAFTA), the Mercado Común Centroamericano (Central American Common Market—MCCA), the Sistema de la Integración Centroamericana (Central American Integration System—SICA), the Caribbean Community (CARICOM), the Comunidad Andina de Naciones (Andean Community of Nations—CAN), the Alianza Bolivariana para los Pueblos de Nuestra América (Bolivarian Alliance for the Peoples of Our America—ALBA), and the Alianza del Pacífico (Pacific Alliance).

Yet these blocs have not measurably improved the region’s global trade position. In the 1960s, LAC countries’ trade with the rest of the world as a percentage of GDP (25 percent, on average) was above the world average (17 percent) and that of Asia and members of the Organization for Economic Cooperation and Development

(OECD) —both 13 percent, on average. However, LAC countries have departed sharply from this trend. 

Between the 1974 oil crisis and the 1994 Marrakesh Agreement (which concluded the Uruguay Round and created the World Trade Organization), LAC’s trade with the world was stagnant, as seen in Figure 1. By 2011, LAC trade as a percentage of GDP was lower than that of Asia (54 percent) and the OECD countries (45 percent) and 10 points below the world average (48 percent). 

By 2016, under existing agreements, 90 percent of the goods traded inside the region will be tarifffree. However, in 2012, intra-LAC trade was 20.3 percent of the total trade in the region—nearly the same as in 1995 and lower than the 62.8 percent of intra-EU trade or the 25.9 percent of Southeast Asian intraregional trade. 

The intrabloc trade is even smaller, as seen in Figure 2, and has barely increased despite ever lower tariffs. For MCCA, interbloc trade was 15.7 percent in 1995 and stood at 17.5 percent in 2012. CARICOM’s interbloc trade throughout the period hovered at around 14.5 percent. As of 2012, the Pacific Alliance still traded less than 5 percent of its exports within the bloc, and Mercosur’s interbloc trade actually declined from 19.5 percent in 1995 to 15 percent in 2012. 

What’s more, despite structural reforms, liberalization and trade agreements both within and outside the region, LAC’s share of world exports fell from 7.1 percent (1965) to 5.3 percent (1990–2000). In 2011, it stood at 6 percent (Figure 3). 

In contrast, the Asia-Pacific region raised its participation in world exports from nearly 10 percent to nearly 30 percent in the same period (between 1965 and 2011), while also multiplying its intraregional trade. This increase is not based on bilateral agreements or blocs, but rather on integration of productive processes directly at the company level,5 supported by investments from Japanese companies and later Chinese and Korean companies. To attract capital in search of location and salary efficiency,6 the countries unilaterally reduced their tariffs.7

The present dynamics of world trade—which emphasize “supranational value chains” (where the different stages of the production process are located in different countries)—present a dilemma for LAC firms, which must be increasingly competitive. This demands deep regional integration to allow businesses to optimize their investments without border restrictions. 

This will be impossible under the present strategy of bilateral negotiations or the expansion of existing blocs. Only a process that integrates the subregional blocs offers an alternative. 

This would make the benefits of existing bilateral agreements and blocs available to all countries. It would also promote trade, spur the generation of value chains, and boost the competitive capacity of the region. A negotiation that included CARICOM, SICA, Mercosur, and the Pacific Alliance would cover all of LAC (except Cuba). A Pacific Alliance–Mercosur agreement would create a powerful economic area. Mercosur–SICA/CARICOM would correct the “missing links” in the region,8 whereas SICA–Pacific Alliance would generate a continuous space from Mexico to Chile along the Pacific coast (except for Ecuador). 

Convergence is achieved by the multilateralization of bilateral preferences (making the preferences in one agreement available to all parties). This would make it possible to provide all countries with equal coverage, terms and levels of tariff reduction, and rules of origin based on the agreements in force.9

Although integrating existing trade blocs will bring enormous challenges, and at the outset, blocs such as Mercosur or ALBA may not participate, the process offers the region’s only chance to advance integration. For example, a Pacific Alliance–MCCA negotiation could be quick, would cover nine countries, and integration would be relatively easy, since both blocs have agreements with the U.S. and the European Union. 

This is more efficient than integrating each country in the MCCA into the Pacific Alliance, and more realistic than negotiating a single large agreement from scratch. 

The aim of integrating regional blocs is not for one bloc to absorb the other or for the memberships of blocs to be eliminated. The multilateralization of preferences will imply a different level of tariff reduction between blocs than inside them and will enable coexistence with other initiatives. For example, if Costa Rica joins the Pacific Alliance, it will gain access to the intrabloc preferences, which may be different from those it would get from a Pacific Alliance–MCCA agreement. However, an agreement between blocs would grant “local origin” status to regional goods, thus permitting the development of value chains. In other words, a producer in Chile (a Pacific Alliance member) would be allowed to import materials from Costa Rica (as of this writing, not a member of the Pacific Alliance) without losing the local origin status of that import for the purpose of exporting it to Peru (another Pacific Alliance country). 

In the short term, expanding traditional market access requires homogenizing tariffs, standardizing rules of origin and permitting regional cumulation of origin (that is, allowing products originating in one country to be modified in a partner country without losing preferential tariff treatment).10 Thanks to the agreements currently in effect, 90 percent of regional trade will be tariff-free on a bilateral basis by 2016. On the one hand, this implies that the main political obstacle associated with the trade liberalization process has already been resolved. But on the other hand, this reveals that there is no space for further bilateral liberalization. One goal would be to reach the same level of tariff reduction (90 percent) by 2016 on a regional basis.

In the long term, there are many other areas of trade that will need to be liberalized, such as services, and the mobility of people and investments. But the success of this process will depend on a pragmatic, gradual and flexible approach.

Endnotes

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Tags: trade, trade blocs




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